by Archie M. Richards, Jr., CFP^®
December 2, 2002

St. Alan is winding down his career. He used to be called Alan Greenspan, but that was before sanctification. St. Alan is now in his fourth term as Chairman of the Federal Reserve Bank. The Fed's principal task of that bank is to make money - our money.

Here's how the system works: The government insists that we pay our bills with U.S. dollars and prevents everyone else from producing them. The green stuff and coin we carry around is minted by the U. S. Treasury. The Treasury spends a few pennies to fabricate a hundred-dollar bill and sells the bill for a hundred smackers. Until the bill wears out, the government keeps the difference. Nice work if you can get it.

But the green stuff is chickenfeed, meandering around from pocket to pocket. The big money sits in bank deposits. If everybody decided to cash in their deposits at once, there wouldn't be nearly enough greenery to go around. Bank-deposit money is created by the Federal Reserve.

A government deficit doesn't necessarily mean new money. The American people have generally hankered for governmental goodies. But they haven't relished forking over taxes to pay for them. Always keeping an eye on the next election, officials have usually relented to the disparity and passed out the goodies anyway, covering the difference by borrowing. Government borrowing does not increase the money supply. Plain folks like you and me lend the government money. The money comes in one Treasury door and immediately goes out another in salaries and subsidies. No new money there.

Enter St. Alan. Let's say he decides that the nation's money supply should be expanded. He buys back from the people, oh, $100 million or so of government bonds. To pay for them, he instructs an acolyte to push a button on a computer. Poof! Numbers representing $100 million appear in the bank accounts of the people who sold the bonds. This is spanking new money. It costs the government nothing to create, except the salary of the guy who pushes the button.

If St. Alan later decides to reduce the nation's money supply by $90 million or so, he dusts off Treasury bonds previously acquired and sells them to the people. The money received simply disappears.

The federal government holds a monopoly over the nation's money supply. It doesn't have to do so, but it likes the power and the profit.

How does St. Alan know how much money to create? He doesn't; he just guesses. Over his 14 years in office, he's made pretty good guesses.

But some of the guesses by former Federal Reserve Chairmen have been disastrous. The two major economic downturns of the 20th Century - the Great Depression of the 1930s and the Pretty Big Depression of 1974 - were rendered far worse by excessive restrictions of the money supply. No matter how well meaning the officials may have been, the heartache, unemployment, and shocks caused by the improper exercise of the money monopoly have been breathtaking.

I can now reveal Mr. Greenspan's job interview prior to his appointment as Federal Reserve Chairman:

President: You realize, Mr. Greenspan, that the enormous powers of the Federal Reserve necessitate your disguising your intentions to prevent profiting by speculators. Tell me, can you talk out of both sides of your mouth?

Greenspan: Yes, sir. I've been taking lessons.

President: Good. Can you keep a straight face while talking in riddles?

Greenspan: I've always been able to do that.

President: Fine. Now, one more thing. Some people think that the government's monopoly of the money supply is pernicious. They suggest that the people should be allowed to choose which of competing currencies are the most convenient and best hold their value. They believe that the Federal Reserve Bank should cease to exist. When any of these suggestions are made, are you prepared to fight like a cornered lion?

(Quietly unsheathing his claws, Greenspan touched the President's arm.)

President: Ouch! That will do Mr. Greenspan. You've got the job.